Big Vanguard ETF is making changes that may rile yield chasers

Vanguard’s $34.7 billion REIT ETF is going to change the index it tracks, but the move may not please some investors.

The $34.7 billion Vanguard REIT ETF is going to get a radical renovation next year when it changes the index it tracks. But will the move create value for investors? Nobody knows for sure.

Vanguard, the $4.4 trillion asset manager, wants to adopt a new benchmark for the exchange-traded fund, which goes by the ticker VNQ, that would add specialty REITs and real-estate management and development firms to the mix.

Currently, the fund — the largest U.S. sector product and the 20th-largest ETF overall — tracks a smaller selection of real estate investment trusts — companies that own, manage or invest in properties.

The decision is being put to shareholders, who have until Nov. 15 to vote on the change.

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A new index may bode well for holders who have watched their ETF underperform competing products like State Street Corp.’s Real Estate Select Sector SPDR fund, since it would add highflying stocks like American Tower Corp. and Crown Castle International Corp. to its portfolio. But it could also decrease the fund’s dividend, potentially hurting those who value the ETF for its 4.3 percent yield.

“Vanguard is missing out on the best-performing stocks this year,” said Todd Rosenbluth, director of ETFs and mutual funds at CFRA. But “it looks like the new index will have a slightly lower yield based on June data,” he said.

The Malvern, Pennsylvania-based asset manager is proposing the shake-up to align VNQ’s holdings with the real-estate-sector classification adopted a year ago by S&P Dow Jones Indices and MSCI, said Arianna Stefanoni Sherlock, a spokeswoman at Vanguard. The change moved REITs out of financials and into their own category, creating an 11th index sector.

State Street’s real estate ETF, symbol XLRE, changed up its holdings a year ago in response and has been rewarded for it. The State Street fund has gained 8.7 percent this year, compared with 3.9 percent for VNQ, according to data compiled by Bloomberg.

The new index could also supercharge the Vanguard fund’s performance if year-to-date track records are anything to go by. The MSCI U.S. Investable Market Real Estate 25/50 Index — the proposed benchmark — has handily outperformed the existing gauge this year, returning 7.1 percent with gross dividends…

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